A virtuous circle or a vicious circle (also referred to as virtuous cycle or vicious cycle) is a complex of events that reinforces itself through a feedback Feedback describes the situation when output from an event or phenomenon in the past will influence an occurrence or occurrences of the same (i.e. same defined) event / phenomenon (or the continuation / development of the original phenomenon) in the present or future. When an event is part of a chain of cause-and-effect that forms a circuit or loop. A virtuous circle has favorable results, and a vicious circle has detrimental results. A virtuous circle can transform into a vicious circle if eventual negative feedback is ignored.

Both circles are complexes of events with no tendency towards equilibrium (at least in the short run). Both systems of events have feedback loops in which each iteration of the cycle reinforces the first (positive feedback Positive feedback, sometimes referred to as "cumulative causation", refers to situations where some effect causes more of itself. Under strong positive feedback, most systems quickly move to a limit state, where the limit is provided by external factors, or into some other new stable state where the positive feedback is somehow negated). These cycles will continue in the direction of their momentum until an external factor intervenes and breaks the cycle. The prefix "hyper-" is sometimes used to describe these cycles. The most well known vicious circle is hyperinflation In economics, hyperinflation is inflation that is very high or "out of control", a condition in which prices increase rapidly as a currency loses its value. Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to "inflation exceeding 50% a month." In informal usage the term is.

Example in macroeconomics

Vicious cycle>Virtuous circle

Economic growth can be seen as a virtuous circle. It might start with an exogenous factor like technological innovation. As people get familiar with the new technology, there could be learning curve effects and economies of scale Economies of scale, in microeconomics, are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as scale is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility, or scale, increases. Diseconomies of scale. This could lead to reduced costs and improved production efficiencies In economics, technical-efficiency is the effectiveness with which a given set of inputs is used to produce an output. If a firm is producing the maximum output it can, given the resources it employs, such as labor and machinery, and the best technology available, it is said to be technically-efficient. X-inefficiency occurs when technical-. In a competitive market structure The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation, this will probably result in lower average prices. As prices decrease, consumption could increase and aggregate output also. Increased levels of output leads to more learning and scale effects and a new cycle starts. However, pollution, natural resource depletion and other externalities associated with uncontrolled economic growth can turn the virtuous cycle into a vicious cycle.^{[citation needed]}

Vicious circle

Hyperinflation is a spiral of inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit which causes even higher inflation. The initial exogenous event might be a sudden large increase in international interest rates An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to or a massive increase in government debt Debt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debt as a part of their overall due to excessive spendings. Whatever the cause, the government could pay down some of its debt by printing more money (called monetizing the debt). This increase in the money supply could increase the level of inflation. In an inflationary environment, people tend to spend their money quickly because they expect its value to decrease further in the future. They convert their financial assets into physical assets while their money still has some purchasing power. Often they will purchase on credit Credit is the provision of resources by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment. The first party is called a. Because of this, the level of savings in the country is very low and the government could have problems refinancing its debt. Its solution could be to print still more money starting another iteration of the vicious cycle.

Example in management

Virtuous circle

An investment in your employees’ ability to provide superior service to customers can be seen as a virtuous circle. Effort spent in selecting and training employees and creating a corporate culture in which they are empowered can lead to increased employee satisfaction and employee competence. This will probably result in superior service delivery and customer satisfaction. This in turn will create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle.

Vicious circle

A harvesting strategy can be an example of a vicious circle. Rather than reinvesting in employee Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as: "A person in the service of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how development, new product development In business and engineering, new product development is the term used to describe the complete process of bringing a new product or service to market. There are two parallel paths involved in the NPD process: one involves the idea generation, product design and detail engineering; the other involves market research and marketing analysis, and market research Market research is any organized effort to gather information about markets or customers. It is a very important component of business strategy. The term is commonly interchanged with marketing research; however, expert practitioners may wish to draw a distinction, in that marketing research is concerned specifically about marketing processes,, management Management in all business areas and organizational activities are the acts of getting people together to accomplish desired goals and objectives. Management comprises planning, organizing, staffing, leading or directing, and controlling an organization or effort for the purpose of accomplishing a goal. Resourcing encompasses the deployment and could decide to harvest their investment Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management by reducing costs In business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is then increasing dividends Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be paid to the shareholders as a dividend. Many corporations retain a or increasing executive compensation Director remuneration is the total pay or financial compensation a director receives within a corporation. A normal executive would receive a basic salary, any and all bonuses, shares, options, and any other company benefit. Over the past three decades, executive pay has risen dramatically beyond the rising levels of an average worker's wage. The consequence of this could be reduced employee wages A wage is a compensation, usually financial, received by workers in exchange for their labor, minimal training The term training refers to the acquisition of knowledge, skills, and competencies as a result of the teaching of vocational or practical skills and knowledge that relate to specific useful competencies. It forms the core of apprenticeships and provides the backbone of content at institutes of technology . In addition to the basic training, an outdated product line, and a failure to understand the needs of the customer A customer, also called client, buyer, or purchaser, is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services. However, in certain contexts, the term customer also includes by extension. This will probably result in employee dissatisfaction, employee incompetence, and high employee turnover. This could cause poor service delivery, customer dissatisfaction, high customer turnover, and loss of market share Market share, in strategic management and marketing is, according to Carlton O'Neal, the percentage or proportion of the total available market or market segment that is being serviced by a company. It can be expressed as a company's sales revenue divided by the total sales revenue available in that market. It can also be expressed as a company's. Reduced sales A sale is the pinnacle activity involved in the selling products or services in return for money or other compensation. It is an act of completion of a commercial activity.[not in citation given] and lower profit margins Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue may require a further reduction in investment thereby initiating another iteration of the vicious cycle.

An Example: Vicious Circles in the Subprime Mortgage Crisis

The contemporary subprime mortgage crisis The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe is a complex of vicious circles, both in its genesis and in its manifold outcomes, most notably the late 2000s recession The late-2000s recession is an economic recession that began in the United States in December 2007 (and with much greater intensity since September 2008, according to the National Bureau of Economic Research). It spread to much of the industrialized world, and has caused a pronounced deceleration of economic activity. This global recession has. A specific example is the circle related to housing. As housing prices decline, more homeowners go "underwater Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down"", where the market value of homes drop below the mortgage on it. This provides an incentive to walk away from the home, increasing defaults and foreclosures. These in turn lower housing values further, reinforcing the cycle.^[1]

The foreclosures reduce the cash flowing into banks and the value of mortgage-backed securities (MBS) widely held by banks. Banks incur losses and require additional funds, also called “recapitalization”. If banks are not capitalized sufficiently to lend, economic activity slows and unemployment increases, which further increases foreclosures.

Economist Nouriel Roubini Nouriel Roubini is an American professor of economics at New York University's Stern School of Business and chairman of Roubini Global Economics, an economic consultancy firm described the vicious circles within and across the housing market and financial markets during interviews with Charlie Rose Charles Peete "Charlie" Rose, Jr. is an American television talk show host and journalist. Since 1991, he has hosted Charlie Rose, an interview show distributed nationally by PBS since 1993. He was concurrently a correspondent for 60 Minutes II from its inception in January 1999 until its cancellation in September 2005, and was later in September and October 2008.^[2][3][4]

Other examples

Other examples include the poverty cycle and sharecropping Sharecropping is a system of agriculture in which a landowner allows a tenant to use the land in return for a share of the crop produced on the land . This should not be confused with a crop fixed rent contract, in which a landowner allows a tenant to use the land in return for a fixed amount of crop per unit of land (e.g., 1 T/ha). Sharecropping.

External sources

• Schlesinger, L. and Heskett, J. (1991) Breaking the cycle of failure in services, Sloan Management Review, vol. 31, spring 1991, pp. 17 – 28.
• http://william-king.www.drexel.edu/top/prin/txt/gro/gro21b.html - An introduction to 20th century virtuous circle theory.
• Rational Choice with Passion:Virtue in a Model of Rational Addiction - In this link the author uses Aristotelian virtue as a mediator between passion and reason in the construction of utility/consumption functions in an esoteric part of consumer behaviour theory related to decision making in addictive situations.
• China: A Stabilizing or Deflationary Influence in East Asia? The Problem of Conflicted Virtue - In this link the author is using virtue in the sense of a positive outcome (balance of payments surplus) that conflicts with long term regional growth and stability.
• http://www.bioenergycentres.com/resources.shtml - an essay in 3 parts by Polarity Therapist Andrew Harry, Bath, UK. Defining The Virtuous Cycle as an integrated healing process.

References

1. ^ NYT-Vicious Cycle in Subprime Crisis
2. ^ Charlie Rose - Roubini & Panel
3. ^ Rose & Roubini Discussion
4. ^ Rose & Roubini

See also

• Positive feedback Positive feedback, sometimes referred to as "cumulative causation", refers to situations where some effect causes more of itself. Under strong positive feedback, most systems quickly move to a limit state, where the limit is provided by external factors, or into some other new stable state where the positive feedback is somehow negated
• List of economics topics Behavioral · Cultural · Evolutionary
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• Endogeneity (econometrics)
• Subprime mortgage crisis The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe

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